Are participants leaving (tax) money on the table?
So it would appear, according to Transamerica Center for Retirement Studies (TCRS), and in an era of the defined benefit’s demise where workers need all the savings help they can get, it’s a problem.
“Most American workers are unaware of an important tax credit that may help them save for retirement,” the center notes. “The Saver’s Credit, also referred to as the Retirement Savings Contributions Credit by the Internal Revenue Service (IRS), is available to eligible taxpayers who are saving for retirement.”
Unfortunately, 62 percent of workers are unaware of the credit, it adds.
“The Saver’s Credit is available to American workers who contribute to a 401k, 403b or IRA,” Catherine Collinson, president of TCRS, said in a statement. “By saving for retirement and claiming the credit, eligible taxpayers may be able to lower their federal income taxes. Saving for retirement can be difficult when juggling financial priorities. The Saver’s Credit might just be the motivator for those not yet saving for retirement to get started.”
What Is the Saver’s Credit?
The Saver’s Credit is a non-refundable tax credit that may be applied up to the first $2,000 of voluntary contributions an eligible worker makes to a 401k, 403b or similar employer-sponsored retirement plan, or a traditional or Roth IRA.
The maximum credit is $1,000 for single filers or individuals and $2,000 for married couples filing jointly.
“The Saver’s Credit is a tax credit in addition to the benefit of tax-advantaged savings when contributing to a 401k, 403b or IRA,” Collinson explained. “Many eligible retirement savers may be confusing these two incentives because the notion of a double tax benefit seems too good to be true.”
Who Can Claim the Saver’s Credit?
The credit is available to workers ages 18 years or older who have contributed to a company-sponsored retirement plan or IRA in the past year and meet the Adjusted Gross Income (AGI) requirements:
- Single tax filers with an AGI of up to $31,500 in 2018 or $32,000 in 2019 are eligible;
- For the head of a household, the AGI limit is $47,250 in 2018 or $48,000 in 2019; and,
- For those who are married and file a joint return, the AGI limit is $63,000 in 2018 or $64,000 in 2019.
Additionally, the filer cannot be a full-time student and cannot be claimed as a dependent on another person’s tax return.
Tips for claiming the Saver’s Credit:
- If the participant is using tax preparation software to prepare their tax return, including those programs offered through the IRS Free File program, use Form 1040 or Form 1040NR. If the software has an interview process, they should be sure to answer questions about the Saver’s Credit, also referred to as the Retirement Savings Contributions Credit and/or Credit for Qualified Retirement Savings Contributions.
- If they are preparing their tax return manually, complete Form 8880, Credit for Qualified Retirement Savings Contributions, to determine the exact credit rate and amount. Then transfer the amount to the designated line on Schedule 3 (Form 1040), or Form 1040NR.
- If you they are using a professional tax preparer, be sure they ask about the Saver’s Credit.
- If they receive a refund, consider directly depositing it into an IRA to further boost retirement savings.
Another important and potentially overlooked opportunity is the IRS Free File program.
Workers who are eligible to claim the Saver’s Credit are also eligible to take advantage of this program that offers federal income tax preparation software for free to tax filers with an AGI of $66,000 or less.
Twelve companies make their tax preparation software available through this program at www.irs.gov/FreeFile.
“We encourage people to help spread awareness of the Saver’s Credit by telling family, friends and colleagues,” Collinson concluded. “The benefit could make a meaningful impact on an individual’s or family’s annual budget, and may be the needed push for non-savers to get on track for retirement. Those who are eligible but did not save last year can still contribute to an IRA until April 15, 2019, and may be able to claim the Saver’s Credit for 2018.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
